Senate Panel OKs Overhaul of Mortgage Finance System

ShutterstockFreddie Mac was seized by the government in 2008.By Margaret Chadbourn

WASHINGTON -- A Senate panel on Thursday approved legislation to wind down Fannie Mae and Freddie Mac and redesign the U.S. mortgage finance system, but sparse support among Democrats means the measure is unlikely to make it into law. The Democratic-controlled Senate Banking Committee approved the bill in a 13-9 vote, with only half of the panel's 12 Democrats voting in favor. Senate Majority Leader Harry Reid is unlikely to bring the measure up for a vote on the Senate floor, according to Senate aides who said it needed wider support among Democrats.

The vote is a major setback for the Obama administration, which helped craft the legislation and worked to build broad support for it. And it likely marks the final legislative action on housing

The bill would replace government-run Fannie Mae and Freddie Mac with a new industry-financed agency that would offer a government guarantee on mortgage bonds, but one that would only kick in after private interests shouldered big losses.

finance reform this year. "This bill represents our effort to draft the final chapter of financial reform by addressing the most significant unresolved issue from the financial crisis -- the housing finance system," Democratic Committee Chairman Tim Johnson said before the vote.

The bill would replace government-run Fannie Mae and Freddie Mac with a new industry-financed agency that would offer a government guarantee on mortgage bonds, but one that would only kick in after private interests shouldered big losses.

Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them into securities they sell to investors with a guarantee, were seized by the government in 2008 as loan losses threatened their solvency. They were propped up with $187.5 billion in taxpayer aid, but have now paid more in dividends to the government than they received in support. The legislation aims to avoid the need for taxpayers to ever have to finance such a bailout again.

Even if the full Senate were to approve it, it was never likely the Republican-led House of Representatives would sign off on the measure, given the opposition of many conservatives to any federal backstop for the mortgage market.

"This is an important milestone," Senator Mike Crapo, the panel's top Republican and a co-author of the bill, said before the vote. "The chairman and I will continue to grow support for this important legislation to repair our broken housing economy."

The White House wanted a floor vote on the bill to establish a starting point for the next Congress.

For years, Democrats and Republicans have said Fannie Mae and Freddie Mac should be abolished, but lawmakers face tough choices deciding how to attract enough private capital to ensure Americans retain broad access to home loans. Fannie and Freddie Mac own or guarantee about 60 percent of all U.S. mortgages.

Many liberal Democratic senators and housing advocates raised concerns the bill would drive up the cost of mortgages without giving enough attention to ensuring all credit-worthy borrowers had access to loans.

Democrats and Republicans also voiced worries it would give big banks too much control of the lending business.